We empirically test a model of foreign research and development (r&d) investments that takes into account strategic interaction in r&d location decisions by multinational firms in the context of r&d cross-investments, r&d spillovers and foreign technology sourcing strategies. We find support for most of the predictions of the model in an empirical analysis of the location of patented innovations by the largest european manufacturing firms in 22 isic industries during 1996–1997. For technology leaders in europe, foreign r&d ratios respond positively to host country product market competition, while technology laggards avoid these locations. Foreign r&d by technology laggards increases more strongly with the efficiency of (reverse) international technology transfer while leaders are attracted more strongly to countries with better intellectual property rights (iprs) protection. Foreign r&d of both technology leaders and technology laggards increases with the size of the local knowledge pool and the size of manufacturing operations in the host country.